One of the most common misconceptions out there is about whether paying rent will help you build credit or not. The truth of the matter is that rent payments are still not reported to credit bureaus the same way mortgage payments are. However, in recent years, the credit reporting system has changed to include rental payments in credit scores, as long as they are reported. So, the question remains, does paying rent build credit? Let’s take a closer look.
First, let's get back to basics - the most commonly reported payment that will help you build your credit score is your mortgage. A homeowner's payment history is well documented, and successful repayment is a positive sign when lenders want to assess the reliability of someone seeking to borrow money. That said, many people rent their homes and apartments, so a record of rent payment can be useful in certain circumstances.
If you're paying your rent as agreed and on time, you're demonstrating that you're financially stable enough to cover your living expenses. This could make landlords more willing to rent to you in the future, and it could even help you when you're trying to buy a home. Besides, paying rent on time and in full doesn't necessarily boost your credit score, unlike a timely mortgage payment. As long as your landlord reports your rental payment history to credit bureaus, you'll start adding to your credit history.
Your score is tied to your credit history, including everything you have paid or failed to repay on time. As it turns out, adding rent payments to your credit score can be beneficial. FICO reports that those who have at least one positive rent payment included in their credit score have an average credit score increase of 13 points. This is helpful for those who are building their credit score from modest beginnings.
For this reason, some lenders might consider the inclusion of your rent payments in your overall credit history. If you do not have much credit history built already, rent payments will help diversify your accounts. Although they will not carry much weight on priority, it may be important. When you're standing at the lower end of the credit spectrum, every little bit helps.
So, does paying your rent build credit? The answer is yes, but not necessarily in the same way your mortgage payment is reported. While rent payments are not guaranteed to affect your credit score, they can certainly form a component of your overall credit scoring model. Regardless of how your rental payments affect your credit score, it's still imperative to maintain consistent payments and good financial habits. It's worth taking time to educate yourself about how your credit works and how credit scores are calculated when it comes to reaching financial goals.